A quality report by JainMatrix Investments CMP: ₹1,532 Reliance Industries – A Firm to Rely On BUY Target: ₹2,200 by May 2022 Date: 14th Jan 2020 Industry: Conglomerate, Large Cap of ₹ 9,85,000 cr. mkt cap Current Valuation: P/E: 23 times and P/B: 2.4 times Overview: Reliance Industries is the largest private sector firm and #1 by market cap in India. RIL has over decades proven its ability to build businesses of global scale and execute complex, time critical, and capital- intensive projects. ~80% of RIL’s operating profits are being generated from the refining and petchem verticals. Going ahead newer businesses like Retail and Telecom are expected to grow profitably. RIL earnings has green shoots from (a) Improving ARPU from Jio wireless business (b) Launch of Jio Fiber Broadband services (c) Traction in enterprise solutions service offering (d) Lower interest costs as RIL aims to become debt free (e) improving margins and stable growth in Retail and eCommerce. Key Risks: (a) Adverse crude prices/ petroleum margins (b) Inability to reduce debt at the committed pace. (c) Lower plastic consumption affecting the petchem vertical. (d) Muted growth in Indian economy. (e) regulatory changes in telecom Advice: Investors can BUY this share with a May 2022 target price of ₹2,200/share. This will allow their investment to appreciate 42% absolute or 17% annualized. Here is our report on Reliance Industries Ltd. (RIL) RIL – Business Segments and Profile RIL is a Fortune 500 firm, the largest private sector firm, #1 by mkt cap in India. It has evolved over 46 years from a textile, polyester and petchem firm to an integrated player across energy, materials, retail and digital services. RIL’s revenue in FY19 was ₹5,67,135 cr. and profits ₹39,588 cr. It has 1,94,056 employees as of FY19. RIL operates in business segments like refining which includes production and sales of petroleum products. The Petchem segment includes mfg. and sales of petrochemicals. The Oil & Gas segment includes exploration, development and production of crude oil and natgas. Retail is organised retail (Reliance Retail) across 20+ verticals. Digital Services segment includes telecom operator (Reliance Jio) and eCommerce (ajio.com) in India and telecom infra. The other business segments are (a) Media (b) SEZ development & (c) Textile. See Fig 1(a). RIL is one of the largest exploration and production (E&P) players in India. The upstream oil business comprises a chain including exploration, appraisal, development and production of hydrocarbons. Reliance entered E&P with a 30% partnership with Shell and ONGC in the Panna Mukta and Tapti blocks. Their domestic portfolio comprises of 5 oil and gas blocks and two Coal Bed Methane (CBM) blocks. Oil and gas is being produced from their PMT, KG D6 & CBM blocks in India and shale gas JVs in the US. Petroleum refining and marketing (R&M) is the second link the core energy and materials value chain. The Jamnagar (Gujarat) plant is the world's largest refining hub. This refinery helped India become a net exporter of petroleum products, and ensuring India's energy security. It has a crude processing capacity of 1.24 m. barrels per Stream Day (BPD). It housing some of the world's largest refinery sub units. It can produce gasoline and diesel of any grade. Fuels are exported world-wide. RIL also has another refinery – the 6th largest – in the SEZ at Jamnagar with a capacity to process 0.58m BPD of crude. Reliance Industries Ltd – Equity Research Report Jan 2020 Within petchem, the products have a range of applications in apparel, packaging, agriculture, automotive, housing, and healthcare. RIL offers comprehensive solutions such as project identification, new product design, product and market development, raw material selection and testing. Relwood and R|Elan are it key product / brand offerings. The fabrics cater to consumers across all segments. The textiles business from its plant at Naroda, makes and markets its brand 'Vimal'. The textile plant consists of mfg., weaving and finishing of synthetic and worsted yarns. Product offerings from these segments are fabrics, apparel and auto furnishing. Fig 1(a) – RIL FY19 Segment revenue/Fig 1(b) – RIL Segment revenue and operating profits Reliance Retail (RR) is the consumer facing business of RIL into organized retailing. RR reported a turnover of ₹1,30,566 cr. for FY19. As on Jun 2019, it operates 10,644 stores across 6,700+ cities with a retail area of over 23 m.sq.ft. RR was started in 2006 and is now the largest retailer in the country. It serves the food and grocery category with Reliance Fresh and Reliance Smart stores. In consumer electronics it operates Reliance Digital, Reliance Digital Express Mini stores and Jio stores, and in fashion & lifestyle category it operates Reliance Trends, Trends Women, Project Eve, Reliance Footprint, Reliance Jewels and AJIO.com in addition to a large number of partner brand stores. Fig 2 – RIL Consumer Business Metrics RR has adopted a multi-prong strategy and operates neighbourhood stores, supermarkets, hypermarkets, wholesale cash & carry stores, specialty and online stores. It has partnerships with international brands such as Report by JainMatrix Investments Page | 2 www.jainmatrix.com Reliance Industries Ltd – Equity Research Report Jan 2020 Armani Exchange, Burberry, Canali, Pottery Barn, Diesel, Superdry, Hamleys, Ermenegildo Zegna, Marks and Spencer, Paul & Shark, Thomas Pink, Brooks Brothers, Steve Madden and Grand Vision. Reliance Retail Ventures Ltd, a subsidiary of RIL is the holding company of Reliance Retail which operates the retail business. Reliance Jio provides end-to-end digital solutions for businesses, institutions and households. Jio offers voice and broadband network. Jio has a three-pronged focus on broadband networks, affordable smartphones and the availability of rich content and applications. It offers combination of telecom, high speed data, digital commerce, media and payment services. Key Executives are: Mukesh Ambani (CMD), Arundhati Bhattacharya (Ind. Director), Nikhil Meswani (ED), Hital Meswani (ED), PMS Prasad (ED), Pawan Kapil (ED) and Alok Agarwal (CFO). Shareholding pattern % is: Promoters 47.29, DII 11.71, QFI 24.33, Individuals 8.97 and Others 7.70. Business Notes, Strategies and Events In Q2 FY20 YoY RIL reported revenue grew by 4.8% to ₹1,63,854 cr. and an 18.3% growth in PAT YoY at ₹11,262 cr. RIL results were good on account of benefits from their integrated Oil to Chemicals (O2C) value chain business and the scale-up of consumer businesses. During Q2 FY20, RIL’s O2C businesses gained from favourable fuel margins environment, feedstock sourcing flexibility and higher petrochemical volumes. In Aug 2019, Jio and Microsoft signed an agreement aimed at accelerating the digital transformation of the Indian economy and society. This 10-year commitment is aimed at offering a detailed set of solutions comprising connectivity, computing, storage and apps essential for businesses and will span across the broad RIL businesses. BP and RIL in Aug 2019 announced a new JV to include a retail service station network and aviation fuels business in India. This JV will also include RIL’s aviation fuels business, which operates at over 30 airports across India. Saudi Aramco in Aug 2019 agreed to invest in the Oil to Chemicals (O2C) division comprising the Refining, Petrochemicals and fuels marketing businesses of RIL. SA would purchase 20% stake valued at an EV of US$75 bn. for the O2C division. SA and RIL have a long-standing crude oil supply relationship of over 25 years. SA is the world’s largest and lowest cost-per-barrel producer and has supplied 2 bn. barrels of crude to RIL Jamnagar. RIL through subsidiary Reliance Brands bought 100% in Hamleys Global Holdings (Owner of Hamleys) in July 2019, for GBP 68 m (₹620 cr.). Hamleys is the oldest and largest toy shop in existence (250 years). Globally it has 167 stores in 18 countries. In India RIL had the master franchise with 88 stores across 29 cities. In Apr 2019 RIL through Jio acquired 87% in Haptic Infotech Pvt Ltd for ₹700 cr. It is one of the world's largest conversational AI platforms, and has processed more than 2 bn. interactions till date, with a client list that includes Samsung, Coca-Cola, Future Retail, KFC, Tatas, Oyo Rooms, Mahindra, etc. Haptik focuses on key customer engagement use cases such as customer support, concierge, lead generation and live chat. Jio will leverage Haptik across various devices and touch points and address the opportunity of 100 crore users in India. In Mar 2019 there were allegations against RIL for sidestepping US sanctions for supplying products to Venezuela. RIL denied the allegations by clarifying that since the imposition of US sanctions, it was in continuous communication with the US Department of State regarding its activities in Venezuela. Further the company has been transparent with US authorities and also had provided updates to the US Department of State. Reliance Industrial Investments (a subsidiary of RIL) in Oct 2018 acquired 12.7% stake in SkyTran, a US based VC funded tech firm developing technology in the field of Personal Rapid Transit Systems. RIL has an option to further invest upto USD 25 m in convertible notes. SkyTran has partnered with NASA and Israel Aerospace Industries (IAI), and developed breakthrough magnetic levitation tech for personal transportation systems to solve the problem of traffic congestion. SkyTran has 8 approved patents and 40+ patents pending approval, globally, including in India. The technology has been developed by SkyTran to create Smart Mobility Solutions. The proposed SkyTran network would consist of computer-controlled passenger pods running on its new, patented Passive Magnetic Levitation technology and would use cutting edge IT, Telecom, IoT and Advanced Materials tech to transport passengers in a fast, safe, green, and economical manner.